Supply Chain Re-engineering at Anheuser-Busch
By C. Gregory John and Michael Willis -- Supply Chain Management Review, 9/1/1998
As is the case with many—if not most—consumer product companies, Anheuser-Busch (A-B) has been experiencing explosive growth in new product introductions since the late 1980s. This has resulted from efforts to expand the product portfolio continuously in response to a changing marketplace and competitive dynamics. But with the proliferation of products comes increased complexity and costs in the supply chain.
In 1994, Anheuser-Busch assembled a multidisciplinary team representing logistics, operations, brewing, transportation, purchasing, engineering, and information systems as well as representatives from the company's wholesaler family. The mission of this Production and Logistics Team, as it became known, was to examine the increased complexity that was putting considerable stress on A-B's supply chain and to re-engineer the supply chain to better cope with the demands placed upon it.
This team went off site to devote itself full time to this effort, which is now well under way. Thanks in large part to the multidisciplinary makeup of the group—especially the presence of the wholesalers—the supply chain re-engineering effort has been very successful to date. It's meeting the targets while gaining strong acceptance within the Anheuser-Busch organization and the wholesaler family.
This article starts with a description of A-B's supply chain and some of the underlying factors that led to the creation of the Production and Logistics Team. It then discusses the team's recommendations, which are embodied in four strategic initiatives known as focused production, inventory deployment, transportation advantage, and order fulfillment. Finally, the article reports on the status of these four initiatives and the ongoing implementation activities.
Supply Chain Complexity at Anheuser-BuschThe Anheuser-Busch supply chain has become increasingly complex in recent years. The company today has 12 breweries producing a wide range of products. These products are differentiated based on brand, alcohol percentage, and packaging.
The product proliferation has occurred at both the brand and packaging levels. The number of brands produced has increased from five in 1980, to 15 in 1990, to more than 50 today. (See Exhibit 1.)
Each wholesaler traditionally has been assigned to a source brewery, which is expected to be the primary source of product for that wholesaler. Shipments from a wholesaler's source brewery are referred to as in-pattern moves. Because of supply and demand imbalances—and the fact that not all products are produced at all breweries—interplant transfers and out-of-pattern moves were becoming more common. This was the nature of the complexity that the Production and Logistics Team encountered upon its formation four years ago.
The team noted early on that, from a supply chain perspective, Anheuser-Busch was involved in two logistically distinct businesses. On the one hand, there was the traditional business we were used to dealing with—and the one that A-B's supply chain historically was designed to handle. This involved products that sold in large volume, such as 12-pack cans of Budweiser. These items had fairly low demand variation and low operating complexity. This business segment displayed the following key characteristics:
- Low-cost/high-volume production runs
- Stable schedules
- Focus on production efficiency
- Minimal inventories
- Flow-through logistics
- Minimal transportation distances
- Focused supplier contracts
On the other hand, there was the newer—and increasingly important—business segment of products that sold individually in smaller volume. These included brands created to compete in the microbrew segment of the market and packages designed to satisfy relatively smaller market niches. Compared to the traditional business segment, these products typically have high demand variation and add greatly to operating complexity. Characteristics of this segment include:
- Short production runs
- Variable schedules
- Focus on flexibility and responsiveness
- Transportation vs. scale tradeoff
- Flexible supplier contracts
The Production and Logistics Team recognized that attempting to perform all of these tasks within the same facility presented quality and efficiency concerns. The complexity associated with A-B's growing product line was affecting all divisions within the beer company. Brewing, packaging, and transportation costs were rising. Wholesalers were seeing their costs rise, too. The complexity also was making it difficult to maintain the level of service the wholesalers expected. The fact that these complexity issues cut across all areas of the company, its suppliers, and its customers made cross-functional buy-in for the team's ultimate recommendations a top priority.
To appreciate the complexity involved, consider the data shown in Exhibit 2. A relatively small percentage of large-volume brand/package combinations ("A" items) makes up a large percentage of A-B's total volume. Meanwhile, the "C" items make up, by far, the largest percentage of brand/package combinations, but account for only 10 percent of total volume. These small-volume C items are the primary drivers of complexity, variance, and nervousness in the supply chain. Yet Anheuser-Busch must remain competitive in this market segment. Obviously, an operational strategy to handle C items had to be developed to support sales and marketing's efforts to maintain and grow market share profitably.
Focused Production: The Pyramid's Foundation
Working in tandem, the focused production and inventory-deployment initiatives are intended to recognize A-B's two distinct business segments and then design the supply chain accordingly. The company's existing supply chain was designed to produce and distribute large-volume brands and packages (A and B items) efficiently. What was needed was a supply chain to deal with the proliferation of small-volume brands and packages (the C items) effectively.
Focused production forms the foundation of the other supply chain initiatives. Rather than having all 12 breweries producing some portion of the C items in their product mix, this core initiative would focus the smaller-volume C brands and packages with fewer breweries. This would enable the other breweries to concentrate on efficiently producing the higher-volume items without having to break into long production runs for a needed C item. This was a key to the overall re-engineering strategy. That is, the underlying intent was not just to develop competencies related to C items but to leverage A-B's current strengths for A and B items as well. Exhibit 4 illustrates the concept.
The team based its decision on which plants should become focused C breweries on a large number of factors. In fact, it considered 22 potential production scenarios. Each scenario was evaluated on the following criteria:
- Capital costs
- Transportation costs
- Operating benefits
- Supplier alignment
- Feasibility
- Support of sales and marketing programs
- Transition complexity
- Future business requirements
Applying these criteria, the Production and Logistics Team chose Fort Collins, Colo.; Baldwinsville, N.Y.; and Cartersville, Ga.; as the focused C breweries. Most of the basic work required to convert these facilities to focused breweries has been completed. The fine tuning to enhance their capabilities continues as new brands and packages are continually added to the product mix.
From 1994 to 1997, the number of brand/package combinations in the product mix increased by 17 percent. Staying with the focus plan has helped control systemwide brewery complexity, actually decreasing the total number of brewery/brand/package combinations by 1 percent. Although these combinations have increased by 42 percent at focused C plants, they have decreased by 17 percent at the other nine breweries. This has resulted in some significant efficiency gains at those high-volume production plants. And although Anheuser-Busch has not been able to place a dollar value on reducing the brand and package complexity, there is a strong consensus within the company that when you reduce unnecessary complexity, you reduce the associated costs.
Inventory Deployment: A Complement to Focused Production
Inventory-deployment strategies are required so that the supply chain can realize all of the benefits offered by focused production. The two initiatives complement each other in a way that helps Anheuser-Busch achieve the lowest total system cost while providing the service required to meet the retail markets' demands.
The Production and Logistics Team considered two options for distributing product in a focused production environment. The first was primarily a deployment strategy for C items. Anheuser-Busch would create "wholesaler support centers" by making use of existing space in a wholesaler's warehouse. These support centers would serve as a distribution point for C items required by other wholesalers located within a relatively short distance. This is the approach now being used for most of the nation.
Under the second option, third-party distribution centers would carry a full product line and generally serve a larger geographic area. This approach is being used in areas where wholesaler support centers are not economically feasible.
A distribution network model was used to identify the optimal number and locations of distribution points in the supply chain. Cluster analysis was used to identify potentially attractive locations for wholesaler support centers or third-party distribution centers. These potential locations then were passed to a mixed-integer programming model for further analysis. The model took into account five key factors:
- Estimated annual fixed and variable costs to operate a site, differentiated by wholesaler support centers vs. third-party distribution centers.
- Estimated freight costs developed from a linear regression model.
- Budgeted demand for A and B items vs. C items by wholesaler.
- Brewery production of A and B items vs. C items, assuming focused plants at Fort Collins, Baldwinsville, and Cartersville.
- Service level requirements.
The output from the programming model served as the starting point for selecting inventory-consolidation sites for the supply chain. Factors not considered in the model, such as a specific wholesaler's available space and interest in serving as a support center, have resulted in adjustments to the sites chosen by the model.
Full product-line third-party distribution centers now are operating in Portland, Ore., and Coon Rapids, Minn. By mid-1998, there will be 29 wholesaler support centers in operation. (Exhibit 5 shows the current location of the breweries, wholesaler support centers, and distribution centers.) Plans call for all domestic wholesalers to be served either by a wholesaler support center or a third-party distribution center by the end of 1998.
Another key synergistic benefit of focused production and inventory deployment is a significant reduction in transportation lane complexity. In 1995, the company was moving finished goods in more than 5,000 shipping lanes. When both of these key initiatives are completed, the number of shipping lanes could be reduced by as much as 60 percent. Small-volume C items that had been shipped from multiple breweries to nearly 900 wholesaler locations now will move from the three focused breweries to approximately 50 inventory-consolidation sites. This reduction in transportation lane complexity is a foundation upon which the company's Transportation Advantage initiative rests.
The first two initiatives of the supply chain pyramid had to be pursued jointly to achieve the maximum overall supply chain benefit. Focused production without inventory deployment would lead either to distributing C items from three breweries to almost 900 wholesaler locations or making interplant shipments of the C items to 12 breweries and then re-shipping to in-pattern wholesalers. Neither alternative would be economically feasible. And both would actually increase system complexity.
Similarly, inventory deployment without focused production would lead to undesired outcomes. Volatility in the shipping lanes would increase because the movement of A and B items would be less likely to remain in-pattern. Furthermore, there would be less consistency in the volumes being shipped on lanes into the wholesaler support centers and more likelihood of requiring less-than-full loads of C product on those lanes. These factors would tend to increase overall transportation costs.
With the first two strategic initiatives about 70 to 80 percent complete, our metrics show that they are right on track. Support center costs, to cite one example, are coming in at 12 percent below projections. And importantly, service to the wholesalers has been exceptional. By utilizing dedicated transportation and delivering C items more than once a week out of the support centers, out-of-stocks on these items have dropped by 53 percent in areas served by support centers. Notably, the dedicated transportation fleet has provided 99-percent on-time service for shipments made from support centers to wholesalers.
Anheuser-Busch also has recorded significant improvements in the brewery operations as a result of these initiatives. The number of interplant shipments has been reduced by 18 percent. The average number of items on loads shipping out of a brewery has dropped 15 percent, and the number of single-item loads shipping out of a brewery has increased by 11 percent. By consolidating the number of distribution points, the company reduced the number of partial pallets shipped from plants by 16 percent. All of these improvements served to reduce complexity in brewery warehouse operations.
Transportation Advantage: Taking out the Lane Complexity
The focused production and inventory-deployment initiatives led directly to an overall reduction in shipping lane complexity. This reduction in complexity, in turn, enabled Anheuser-Busch to reduce transportation costs significantly through the Transportation Advantage initiative. The Production and Logistics Team established an estimated 1996 transportation cost baseline of more than $400 million for the company's supply chain. This included transportation for shipping finished goods to wholesalers; for packaging materials from suppliers to breweries; and for returns of cooperage, pallets, and trade return bottles from wholesalers to the breweries. The real challenge in achieving cost efficiencies, though, was that A-B did not control all of these transportation costs. They were controlled by the company's wholesalers and a large number of suppliers.
Several specific factors limited A-B's ability to reduce overall system transportation costs. For one, some of the most stable and attractive shipping lanes are the in-pattern lanes for finished goods. Traditionally, these lanes have been controlled by the wholesalers, who assumed responsibility for these shipments, using either contract haulers or wholesaler-owned fleets. Ultimately, Anheuser-Busch will need to be involved in managing a majority of in-pattern shipments to realize the full benefits of the Transportation Advantage program.
Complicating the whole issue was the fact that Anheuser-Busch and its wholesalers and suppliers used more than 1,000 different trucking companies to haul freight in 1996. This number needed to be decreased significantly if A-B were to reduce transportation costs. The total shipping volume traditionally has been spread over a large number of lanes, many of which were undesirable from a carrier perspective and which carried very little A-B volume as well. The priority in addressing the problem was to eliminate many of these undesirable lanes and concentrate heavier volume on the remaining ones through the establishment of focused C breweries and wholesaler support centers.
Assuming responsibility for all transportation costs would require a paradigm shift within Anheuser-Busch and its wholesaler family. In general, the wholesalers were comfortable with making the transportation arrangements for all in-pattern shipments. The first step taken to build their confidence in the new initiative was to set up a successful transportation program for all shipments from wholesaler support centers to the wholesalers. As each new support center came on line, a single dedicated carrier was chosen to handle all outbound shipments to the wholesalers. A-B made all of the arrangements, placing strict service requirements on the dedicated carriers.
These dedicated arrangements have proven to be quite successful and have been well received by the wholesalers. They have experienced 99-percent on-time delivery, little in-transit damage to the product, and courteous and cooperative treatment from the carriers.
The opening in September 1997 of a new distribution center in Coon Rapids offered another opportunity to build wholesaler confidence in Anheuser-Busch's ability to manage transportation. This facility would serve wholesalers in Minnesota, North Dakota, South Dakota, and parts of Wisconsin. These wholesalers had previously been in either the St. Louis or Fort Collins brewery source patterns. The opening of Coon Rapids necessitated completely new transportation arrangements. The wholesalers now would be getting all of their product from the new distribution center. This provided a perfect opportunity for A-B to step in and arrange transportation in this region. To encourage participation in the new transportation program, wholesalers were offered an incentive to share in any savings that resulted from it.
As with the dedicated trucking operations at the wholesaler support centers, Anheuser-Busch chose a single dedicated provider to handle all outbound transportation from the Coon Rapids facility. Some of the savings expected from this operation will come from the use of specialized lightweight equipment that can handle a 12-percent higher payload than the typical over-the-road unit. This dedicated fleet has provided the same excellent service as the support center fleets, resulting in a high level of wholesaler acceptance.
The next step in the Transportation Advantage initiative centered on shipments from a brewery to in-pattern wholesalers. In November 1997, A-B launched a pilot program to arrange transportation of product from the St. Louis brewery to wholesalers in Illinois. The company entered into a partnership with a third-party logistics company to handle all of the loads in the pilot program. This third-party provider uses a dedicated fleet for the majority of shipments, while tendering the remainder to outside carriers.
In addition to handling outbound beer shipments to Illinois wholesalers, the third-party provider is managing inbound return loads from those wholesalers. Anheuser-Busch is working to expand this service to include inbound packaging materials and revenue-generating backhauls from locations in close proximity to the participating wholesalers.
The pilot program is using the same dedicated fleet of lightweight equipment as in the Coon Rapids operation. And the cost and service benefits are expected to be similar. This pilot is being expanded to wholesalers in Iowa and portions of Wisconsin, and is expected to include the entire St. Louis pattern by the middle of 1998. The target date for completing systemwide implementation of the Transportation Advantage program, now about 20 percent complete, is the end of 1999.
Order Fulfillment: Completing the Pyramid
Order fulfillment, the final strategic initiative in the supply chain pyramid, is just getting under way. Its primary objective is to re-engineer the beer company's order-fulfillment process to better support the other three initiatives, most notably Transportation Advantage. In order to realize the full benefits of the supply chain re-engineering effort, this initiative needs to be implemented effectively.
Order fulfillment encompasses systems and processes for scheduling brewery production, planning warehouse inventories, writing and scheduling wholesaler orders, and arranging transportation. The preliminary design for this initiative will ensure that the interrelated impacts of these systems and processes are measured and understood. Response to changes in one process will be automatic and take into account total system impacts. Flexibility in orders will be maintained so that decisions on loading times, load configurations, carriers, and destinations can be postponed as long as possible.
To reduce transportation costs further, Anheuser-Busch needs to increase carrier asset utilization by consistently providing more volume over fewer lanes. This is key to obtaining all of the benefits expected from the Transportation Advantage initiative—and it's the first area that the order-fulfillment initiative will attack.
A Foundation for Future InitiativesThough still in the midst of this supply chain re-engineering effort, Anheuser-Busch already has recorded some important operational and service success stories. Much of the success enjoyed to date relates to the fact that the Production and Logistics Team was composed of representatives from all affected divisions within Anheuser-Busch as well as from the wholesaler family. Without this broad constituent base, obtaining the required process knowledge and acceptance across the supply chain would have been extremely difficult.
Anheuser-Busch and its supply chain partners recognize the compelling advantages of the re-engineering effort. They understand that each of the initiatives is creating much-needed change in the way that the company does business internally—and the way in which it deals with its suppliers, transportation providers, and wholesaler family.
Going forward, Anheuser-Busch plans to extend the reach of these supply chain initiatives upstream toward its suppliers and downstream to the retailers. The emphasis will be to make all members of that extended chain as productive and efficient as possible as they pursue a unified supply chain mission: to deliver a growing variety of quality products smoothly and cost effectively to the end consumer.
| Author Information |
| C. Gregory John is manager of transportation systems and planning and Michael Willis is director of logistics strategies for Anheuser-Busch Inc. They are based in the company's St. Louis headquarters. |
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